When you are just starting, it might feel like your salary is barely enough to cover rent, utility bills, debt repayments, and groceries, especially when the cost of living increases.
Once you have managed to budget for these essential expenses and have saved a little for emergencies, it's a good idea to begin investing. The challenge is deciding "where's" and "how's" to invest.
As a beginner, you will face many questions, such as how much money you need to start, how to get started, and what the best investment strategies are for beginners.
An investment portfolio can comprise multiple asset classes like stocks, bonds, real estate, cryptocurrency and many more. The principle of diversification aims to reduce overall investment risk by spreading investments across different asset types.
For instance, if you invest solely in one stock and that company goes bankrupt, you could lose all your money. However, in a diversified portfolio that includes stocks from various industries and countries, along with bonds and mutual funds, your risk is distributed, making it less likely for you to lose everything.
Here is how you can go about building an Investment Portfolio if you are just starting out:
Step 1: Budget
The first step is to create a budget. Divide your paycheck into two portions: one for your day-to-day expenses and the other for savings.
Keep in mind to keep your savings percentage at least 30% of your salary.
Step 2: Building an Investment Strategy
Set your financial objectives, such as how much money you want to save, the type of lifestyle you want in retirement, and how much risk you’re willing to take on.
Short-term vs. Long-term Goals
For short-term goals like saving for a trip or a major purchase, you should consider conservative investments. For long-term goals, such as retirement savings, you can be more aggressive.
Risk Tolerance and Investment Horizon
Your risk tolerance is the level of risk you're comfortable with. It is generally influenced by your age and financial situation. Your investment horizon is how long you plan to hold an investment. Knowing these factors helps you determine the right investment mix.
For example, if you have a long investment horizon and high-risk tolerance, you might invest in stocks or mutual funds. If you have a short horizon and low-risk tolerance, bonds or fixed-income securities may be more suitable.
Aligning Goals with Your Investment Strategy
Identify your financial goals and create an investment strategy that aligns with them. Set a target asset allocation that matches your risk tolerance and investment horizon. Regularly review and adjust your portfolio to ensure it stays aligned with your goals.
Step 3: Start Investing
The earlier you start your investments, the better it is. Now you can divide your savings budget further into four parts and invest in these investment avenues, which will help you grow wealth and save on taxes:
Public Provident Fund (PPF)
Why PPF ?
The PPF is a government-backed savings scheme that offers tax benefits under Section 80C of the Income Tax Act. It provides a fixed rate of return, making it a low-risk investment.
How to Invest ?
Open a PPF account with your bank. The minimum annual deposit is Rs 500, and the maximum is Rs 1.5 lakh. The investment has a lock-in period of 15 years, with partial withdrawals allowed after the sixth year.
Benefits: Apart from tax benefits, the interest earned and the maturity amount are also tax-free. This makes PPF an excellent long-term investment option for building a retirement corpus.
Systematic Investment Plan (SIP) in Mutual Funds
Why SIPs?
SIPs allow you to invest a fixed amount regularly in mutual funds, providing the benefit of rupee cost averaging and the power of compounding.
How to Invest?
Choose a mutual fund based on your financial goals and risk tolerance. Start a SIP with only Rs 500 per month. Many online platforms and financial institutions offer easy SIP setups.
Benefits: SIPs are flexible and can be stopped or modified at your convenience. They promote disciplined investing and offer higher returns compared to traditional savings schemes.
Medi-claim or Insurance
Why Mediclaim?
It protects your savings from unexpected medical expenses. Starting early reduces the premiums you have to pay.
How to Invest?
Research and choose a health insurance policy that covers a wide range of medical expenses and a life insurance policy that offers sufficient coverage.
Benefits: Premiums paid for health insurance are qualified for tax deductions u/s 80D. These policies provide peace of mind and financial stability in the long run.
Equity Investments
Why Invest?
Equities offer higher returns compared to other asset classes over the long term. Investing in stocks can help you build substantial wealth.
How to Invest?
Open a dematerialised and trading account with a reputable broker. Research and select stocks based on company performance, market trends, and your risk appetite. Consider starting with blue-chip stocks or index funds.
Benefits: While equities are subject to market risks, they provide significant returns over time. Diversifying your portfolio and investing for the long term can help mitigate risks and achieve financial growth.
Conclusion
Initiating an investment portfolio may seem daunting, but with the proper tools and knowledge, you can create a portfolio that aligns with your financial objectives. It's important to start and diversify your investments to reduce risk and enhance returns.
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